All right, good morning, everybody, and welcome to the 2019 Ventas Investor Day. I'm Juan Sanabria, Vice President of Investor Relations. I'll be your emcee for today. As we start, let me express that all projections and predictions and certain other statements to be made during the company's presentation at our Investor Day may be considered forward-looking statements within the meaning of the federal securities law.
The company cautions that these forward-looking statements are subject to many risks, uncertainties, and contingencies, and stockholders and others should recognize that actual results may differ materially from the company's expectations, whether expressed or implied. Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations.
Additional information about the factors that may affect the company's operations and results is included in the company's annual report on Form 10-K for the year ended December 31, 2018 , and the company's other SEC filings.
Please note that the quantitative reconciliations between each non-GAAP financial measure referenced during the company's presentation and its most directly comparable GAAP measure are available in the Investor Relations section of our website, www.ventasreit.com. Without further ado, I'd like to introduce our Chairman and CEO, Debra A. Cafaro. As she comes up, watch a short video to start.
What does the future of healthcare look like when its potential is fully realized? What can healthcare providers, operators, and innovators achieve with the power of capital behind them? How many more goals can they reach? And how much faster can they reach them? Ventas is the world's premier healthcare real estate investment trust, an S&P 500 company, where long-term success for our partners and consistent performance for our stakeholders go hand in hand.
Where financial strength and deep experience lead the way, ready to leverage the opportunities, the demands, and the demographic momentum of a rapidly aging population. Where the real estate we build is setting the foundation for real healthcare solutions. Because at Ventas, we don't just invest in properties, we invest in possibilities, empowering our partners to help more people than ever before. Providing medical professionals expanded options to treat and cure patients in world-class buildings.
Enabling seniors communities to help our parents and grandparents stay active and age with dignity. Fueling centers of research and innovation with the resources they need to explore new technologies and discover groundbreaking solutions to our most urgent healthcare challenges. So what does the future of healthcare look like with the power of capital behind it? For Ventas, our partners, and the patients, families, and communities we serve, it looks like possibilities expanded, potential realized, and excellence sustained.
Good morning. That video never ceases to bring a tear to my eye. I want to welcome you to day two of our Ventas Investor Meetings. We want to continue the high level of engagement, of energy, of education, and enthusiasm we had yesterday. So that's a tall order, but we're gonna give it our best. Today, we're gonna talk about our advantage portfolio, our extraordinary partners, and our tenured and skilled people.
I have to say at the outset that in my wildest dreams, I could never have imagined in 1999 that I and Ventas would be standing here, privileged enough to own the portfolio we do, have the rich and productive partnerships with industry leaders that we do, and to benefit from the commitment and drive of the incredible people that we do. I personally am incredibly grateful.
But probably more importantly for you, the great news is I'm also incredibly energized about what this combination can achieve together in the future. We have a great executive team, and I want to specifically recognize Bob Probst, John Cobb, and Pete Bulgarelli, my partners this morning, for their enormous contributions, past, present, and future, to Ventas' success. They are really driving the company forward in a huge way.
You'll also see a cross-section of our deep and experienced leadership team from investment and asset management today. They'll share their unique insights into what makes Ventas special and effective. And likewise, you'll get to experience the depth and richness of our people. You'll also hear from our outstanding partners. Uniquely in our business, our partners are key ingredients to our success. Working in all of our verticals with the best in the business, in true collaboration, makes all the difference.
That's true whether they're long-standing partners, like leading care provider, Atria, those we've been aligned with for several years, like Wexford Science and Technology, and our university-based research and innovation business. Or recently announced connections, like the University of Pittsburgh and Le Groupe Maurice. Through my 20-plus years at Ventas, we have followed a consistent, successful strategy that endures today.
We strive to combine a high-quality, diverse portfolio, benefiting from strong demographic demand, with partners who bring scale, skill, and access to growth opportunities together, and then let our collaborative and experienced team get after it. Our goal is to produce consistent, growing cash flows and superior returns on a strong balance sheet. We've been agile in our execution through volatile capital markets, changing operating conditions, and as we've entered and exited businesses along the way.
With our cycle-tested, data-driven, and results-oriented team, we have the perspective needed to drive sustained performance, and as you know, we've delivered, with over 23% compound annual return since two thousand. Of course, you can see that it hasn't been a straight line, and you can look through the phases of high growth and the phases like the financial crisis, when we were smartly defensive.
Most recently, we've pursued a multi-year period, during which we've deliberately reshaped and elevated our portfolio, extended and added key partnerships, and retained, empowered, and expanded our team, and now we're ready to pivot to growth. And that pivot to growth is in 2020 , and we're excited about it. Today, our team will share with you the roadmap underpinning our confidence in Ventas' future growth trajectory.
One key upgrade in our portfolio over the years is our large and successful medical office building and outpatient business, which has grown, and the addition of our university-based research and innovation portfolio. These high-quality, high-credit parts of our portfolio have replaced our skilled nursing business. We've also created and extended key partnerships in a replicable fashion over the years. First, with a well-thought-out investment thesis, we align with a scalable, skilled partner and management team and a nucleus of high-quality assets.
Then we put our backs and our capital into building that business with our expertise and commitment. We've followed that pattern successfully, time and again, from Lillibridge to Ardent, Atria, Wexford, and hopefully now, once again, with Le Groupe Maurice. And finally, our experienced, collaborative, and tenured team makes it all happen.
With great gender balance, high engagement, and years of working together, sparked by the infusion of new talent, we are committed to each other and committed to delivering results to our stakeholders. You'll hear a lot today about the four building blocks that underpin our 2020 Pivot to Growth: a powerful senior housing upside, delivery of our research and innovation pipeline with leading universities, reignition of our external investment machine, and good old-fashioned core portfolio growth.
Together, these building blocks should drive NOI, normalized FFO, and cash flow growth, resulting in 5%-7% normalized FFO growth in our five-year outlook. With our reliable, growing dividend, those inputs should translate into 10%-12% total return growth during the period.
Our attractive enterprise and growth profile should also drive well-deserved multiple expansion, which, if achieved, will result in total shareholder return above 12% during our five-year framework horizon. Now, I hope you'll listen up as our team brings to life our opportunity to drive results and value creation at Ventas. I'll turn it back over to Juan. Thank you very much for being here.
Thank you, Debbie. Let me walk through today's agenda for the rest of the day. So we'll start with two exciting, hard-hitting panels. First, we'll do seniors housing, the powerful upside that we see, followed by the R&I growth opportunity. We'll then have a short break and break out into three breakout sessions, where we'll divvy up the audience into three groups, just like we did yesterday.
For those of you who weren't with us yesterday, you'll have a dot in the back of your name badge that will dictate what group we go into, but we'll talk about the core triple-net growth business, medical office, and seniors housing operational excellence with Atria, where we'll rotate rooms using the color dots again, like we did yesterday.
Then we'll break for lunch, start back up a little bit before 1:00 P.M., and then we'll finish off the day strong with an external growth panel, the whole group back here in this main room, and then Bob tying it up with a five-year growth outlook, and we'll be wrapping it up with a Q&A session. So we should be wrapped up the day by around 3:00 P.M. I'd note that all the panels will have some time for Q&A, and at the end of the day, we'll have buses to take everybody either to the train or to the airport. So those of you in New York taking the train back, you should be home in time for dinner.
But now, without further ado, I'd like to invite the SHOP team up, led by Bob Probst, who will introduce the rest of the panelists.
All right. Good morning, everybody. Hope you're doing well. Who wants to talk about senior housing? We do, and I'm really happy today to be joined by two of my colleagues. These, I think you'll find, are two wonderfully experienced and very, very smart people, starting with my friend Chris Cummings. Chris has been with the business for 17 years, Ventas for 17 years.
Very deep experience in senior housing and runs our senior housing business, across the whole platform for the company. Ricardo Damas, relatively new to the team, compared to Chris, but a year in. Great experience in strategy at both Pepsi and at McDonald's, and joined us a year ago, really focused on strategy and data analytics as it relates to senior housing. So I think you'll see, in both cases, tons of insights today from both of them.
Of course, we're supported by a fantastic team back at the ranch and couldn't do this without them, so we thank each of them as well. Three things we wanna communicate today as it relates to senior housing. The first is we do believe we have proprietary information that leads to clear insights that allow us to make better decisions, and that is an advantage and differentiated position.
Secondly, we think we're differentiated as it relates to our portfolio, the quality of our portfolio, of course, our operators, and both of those position us very well to take advantage of the coming recovery that we see and the upside that we see in senior housing over the five-year period, and we expect to outperform in that context.
The numbers behind that, third, is we expect to grow over that five-year period, our same-store cash NOI and SHOP between 4% and 6%. That's the case we'll make to you today in the next 38 minutes. With that, I'll hand it to my friend, Ricardo.
All right. All right, good morning, everyone. I'm very happy and excited to be here today to share with you how data analytics informs the way we see upside in seniors housing and how it will impact our SHOP portfolio. So let me start by laying out the foundation of the work we do, and I share your pain when you look at data in this industry. It's not easy, and it's not comprehensive.
So we spent a significant amount of time to collect data to truly give us a picture of what's happening in the industry, and when it comes to data, scale matters. And scale benefits Ventas in two ways. First, on the left-hand side here, we have one of the largest footprints in the industry, in a very fragmented industry.
Second, within our SHOP portfolio, we have a concentration of large, sophisticated operators who also have data analytics in their own right. And together, we have been able to collect billions of data points throughout the years to inform our decision making. So the question is: What does this data look like? And what you see on this page is our data analytics ecosystem.
Today, I will spend some time sharing with you the way we look at data for capital allocation portfolio management decisions. Later today, you will hear from Atria, one of our partners, how they look at data for revenue optimization and expense management.
I also like to highlight that we have an exclusive agreement with a data science company called Tiger Analytics, that is 250 data scientists strong, working on a 24/7 pace to allow us to expand our analytics capabilities in a very fast-paced way. Now, enough about the setup. Let's talk about the insights. And I think we're all here to see the upside, so here it is.
Now, let me orient you first in this slide before we get to the insights. What you see on this page is the way we look at demand and supply in our SHOP markets, our SHOP geographies. The blue line represents demand. When I say demand, I do not mean population. I mean actual customers of seniors housing growing every year. So how many new customers we see every year throughout the years.
The green line represents supply, how many new units are coming to the market in each time period. So those two lines belong to the same scale. You're literally looking at heads to beds comparison throughout the years. Now, let's talk about the insights here. First, as the lines start to converge in the second half of 2020, you will see increases in occupancy in the markets where we operate.
More importantly, once those lines cross, demand will consistently outpace supply in the latter years of this five-year period. And as you can see, the lines open towards the end because we have to build scenarios to understand what is the probability of that demand outpace supply to continue. No matter the way you look at those scenarios, you will see this upside happening throughout the latter part of the years here.
To look a little bit behind the scenes on what gives us confidence in this analysis, we first start with the data we know. We have spent a significant amount of time to create a proprietary database of every property that is under construction in the United States today. This is not just industry information, and I know many of you go through the pains of estimating the errors or restatements that are going to come from under-construction data.
We have spent the time to collect data from multiple sources in real estate and outside to make sure we are tracking every project under construction. How many units are being built? Where they are being built? When are they going to be delivered? That's not enough for this exercise. You also need to look at pre-construction projects, the ones that have not yet broken ground.
The ones that are in planning phase, going through zoning processes or permits, but have not yet broken ground. So we also set a database, again, from multiple sources, from real estate and outside, so we can track not only when those properties are going to break ground, but also what characteristics those properties will bring to the markets where we operate. On the demand side, you have two very important elements.
The first one that everybody in the room is familiar with is demographic growth. We all know that there's a demographic wave of population on the senior side of the U.S. But be aware of those seniors are going to actually be customers of the senior housing product, and that's how we define penetration, the percentage of seniors who actually are going to be customers of the services we offer.
When you go to a five-year horizon, you then need to establish scenarios. We establish a conservative scenario, a base case, and an upside. The two key variables are, on the supply side, is the rhythm of new starts. Starts that have not even been planned yet. What will they look like in the future? On the demand side, the key question is penetration, because demographics is destiny.
We are really now measuring what percentage of those seniors are going to come to seniors housing. Very briefly, when it comes to starts, in our conservative scenario, we ramp up starts to 2015 levels, which is a historical high. In our upside scenario, we bring them down to 2011, which is a historical low.
And in our base case, we keep tracking with the current trend for each one of the markets where we're operating. So the pace of starts continues to grow at the same pace it grows today. On the demand side, you have to flex penetration. And in a conservative scenario, assuming that the percentage of seniors living in senior housing will be flat throughout the years. In our upside scenario, given awareness, word-of-mouth, understanding of the product, you see that penetration grow.
And in our base case, it grows in line with the market trend. Now, it's really important to highlight that today in the U.S., the penetration number has been growing at a rate of ten basis points a year. So even as we sit today, you will see a growing interest in the product and this translation of the population growth into customers in the markets where we operate.
Now, we all know real estate is local, and the picture I showed you is national. So when it comes to understanding what local means in seniors housing, we are borrowing a concept that is well known in other real estate asset classes. Whether you look at commercial real estate or you look at residential real estate, you have the players looking at submarkets to define the geographical and the psychological barriers that customers have in mind when they are making decisions about where to live or where to open their business.
So we propose today the use of submarkets to look at seniors housing as well, and I'll walk you through what that means. We also look at demand, and as I said before, at a local level, both from a demographic as well as from a penetration standpoint, and that does vary by geography.
Finally, when it comes to future supply, it's all about the data. It's all about how good is the information you have today about everything that is under construction and pre-construction, and how do you assign probabilities for opening and opening date of each one of those projects? Okay, so if you're with me so far, it's gonna get a little deeper, but be there with me because I think it will be interesting for you. I will start with submarkets, which is the first element.
What you see on the left-hand side here is a map surrounding one of our properties in Phoenix, and the blueprint is the submarket. We are grounding the submarket, not in our own opinion or our own art. It's really based on customers' behavior.
So what you see on the left-hand side is where the customers for that property in Phoenix come from. The green dots represent where they come from, and we are using submarkets to define the catchment area of demand. So that's number one. Number two, on the right-hand side, you have in the west suburbs of Chicago, another one of our properties.
And what you see on the dots is where customers chose to go when they were considering moving to one of our properties. So where the inquiries that were lost ended up going. And this way, we can trace the actual competitors to our properties. We're not guessing where—who the competitors are. We're actually looking at what trade-offs customers are actually making when they go to seniors housing.
So at the end of the day, what we are doing with submarkets is balancing the size of the geographic footprint with coverage of demand and supply. And what you see on the right-hand side is a comparison across MSA, which is the highest level that you can look at demand and supply. You have 80,000 seniors living on average in an MSA. And in contrast to that, you have census block, which is information that everybody has available, and it's simply too small.
You can't look at millions of data points, geographic data points to make a decision. You need to be able to roll it up to a meaningful level. So with submarkets, we strike this balance between how much you're covering ground and to what extent you have the coverage of demand and supply for each one of our properties.
Two more things on submarkets. One, many of those submarkets actually have incremental demand coming from net migration of seniors. And as you would suspect, one of the drivers of migration is warmer climate, another one is lower taxes. But when it comes to seniors housing, there is also a third element, which is proximity to adult children. So by tracing where the adult children are living, where they are moving to, you also see a movement of seniors towards those same geographies. The blue dots here represent those destinations, those markets that get a boost from that migration.
And then on the right-hand side, I'm just illustrating, using another map of one of our properties, and again, the blue print here represents submarket, that, if you look at mile radii or if you look at driving distance, you may not be capturing the overall footprint of your competition, where, where your competition really is. And the reason why this is important is because by assessing your competition, you can also generate insights.
You're not only tracing who you lost customers to, but you're also tracing why. And in many instances, that provides insight for us to think about, for instance, if we lost due to a product offering, perhaps there's an opportunity for us to change our product mix in order to bring in those customers. So moving on to demand, which is the next component. Two insights I'd like to offer you here.
First, instead of using 80 plus or age cohort 75 plus to estimate future growth in population, we propose the use of the actual moving distribution curve of the age cohorts that we have in our properties, which is the histogram you have on the left. So 50% of those who move into our properties are younger than 85.
And the reason why this is important is those age cohorts not only have different sizes, but the younger you go, the faster it grows, and that's what it shows on the right-hand side here. So by knowing the mix of ages, and this is done at a submarket level, you can also assess what is the degree of growth that you expect to see simply from a demographic standpoint. As I mentioned before, there's a second element behind demand growth, and that is penetration.
Penetration meaning within the number of seniors in any given market, what is the percentage that actually uses the seniors housing product? So today, in our markets, that number is 13.6%. But more insightful is the fact that that number varies significantly across markets, and there's a variety of reasons for that. And one thing I'd like to point out is that as you look at this difference across submarkets, there's significant upside towards the right.
On the left-hand side, you have usual suspects, such as the Pacific Northwest, regions of Florida, that have traditionally had a history of seniors housing as an offer, and there's high awareness of what the product is, how much it costs, what the benefits of it are, and that educational process can actually lead to higher penetration towards the right, which has other markets that we are also present in.
When you add the demographics to the penetration growth, that, as I said before, has been growing at a 10 basis points rate nationally, you get an increment to your demand to the tune of 75% of it being delivered by demand growth, by population growth, and 25% of it driven by penetration growth. Now, you may be asking yourself, does this model work? Is it predictive? Obviously, the answer is yes.
Otherwise, I would not be asking you. So, we did run a back test, and we looked at actual performance. So if you look back three years and you use the submarket approach and you use the demand estimates that I showed you, what is the actual versus the prediction of the model? And we have a pretty good fit. We can predict at a submarket level, what is the demand going to be three years out?
And with that, we have this R- squared, which basically represents how much of the variation in data is captured by this model of 72%. Now, for the geeks in the room, this is a great number, but we continue to improve this number by refining our models in order to be able to enhance our predictability. The last slide I have for you is how we look at supply.
As I said before, there's no guesswork in supply. It's all about knowledge of what's happening in each one of the markets. So we have three buckets here. The first one is every property that is under construction in the U.S., and I cannot emphasize enough the amount of effort that goes into that. It's not a single data set. We need to collect that information from a variety of sources.
And in that particular case, the key is to track those projects so you know what's the delivery date for each one of them and when they will hit the markets where we operate. The second bucket is pre-construction. As I mentioned before, those are projects. They have not yet broken ground. They are going through zoning. They are going through permits. Many of them only hired an architect so far.
For each one of them, we look at what is the probability of breaking ground, and if it breaks ground, when it's going to deliver. The third bucket is the future projects, what we don't know, and here we need to build those scenarios I described to you. However, in the next three years, we have confidence that by leveraging the first two buckets, we will see a decline in deliveries. That's because if you're sitting today, June 18th, 2019, and decides to build a seniors housing community, most likely, at the best case, you are going to deliver this at the very end of 2021, but most likely in 2022.
So this ground is covered, and it shows this 35% decline in deliveries, and that's part of what builds this confidence about that crossover point that I showed you earlier today. So I'm here to show you the analytics. Chris will now show you what does it mean from a competitive standpoint and how does it reflect in our P&L upside.
Great. Thanks, Ricardo.
All right. So it's a great platform. I've been here 17 years, and this has been something that's been near and dear to my heart. Very passionate about this from day one. One of my first projects 17 years ago was to build a Ventas asset management system that collected data and aggregated it and reported out on it.
So this is a long way from that, and Ricardo's done a great job. So what do we do with this data? How does it work? So I want to start with, I would say, the three things that we use data for. One, benchmarking. So we're benchmarking against our peers, property to property, operator to operator. Two, we're using it to forecast. And three, we're using it to make pricing decisions on selling, buying, repositioning assets, how we allocate capital.
Let me start with benchmarking against our peers. As Ricardo said, the submarkets, what we've done is carved up the U.S. into roughly 1,400 submarkets, and Ventas SHOP assets are in 194 of those submarkets. And when you look at the demand in our submarkets relative to our peers, apples to apples, weighted on units, we are in line, or in some cases, better than our peers on a demand basis. In addition, the growth of penetration in our submarkets, in other words, the submarkets in which we're in, actually have had a faster pace of penetration growth than our peers.
One stat that's not on here that I find interesting is when you look at all 1,400 submarkets in the U.S., and you look at the demand over the next five years, the demand growth that is, our 194 submarkets capture almost 50% of that demand, okay? So 194 out of 1,400. So we are in the right submarkets to capture the most demand growth in the U.S.
When you think about new supply, on the right chart, what you'll see is, again, on an apples-to-apples basis, we've weighted this on units. Ventas actually has more exposure to markets where there's zero new supply or less than 3%. Our peers actually have more exposure to submarkets that have greater than 3%, in some cases, greater than 6%.
So we think that we're very well-positioned in the U.S. from a supply perspective relative to our peers. So let's talk about the second thing that we use data for, and that is forecasting. So as Ricardo said, you know, when you look over the next five years, one of the foundations for our forecast is what's gonna happen to occupancy. Occupancy is really predicated on what the formula that Ricardo outlined, net demand, okay?
Net demand, this is a mathematical equation, okay? And this allows us to be very confident using our proprietary data and what occupancy is going to do, and this is the foundation of the five-year P&L. In our submarkets, what we expect is occupancy growth over the five-year period to range between 300 basis points and 500 basis points, so pretty strong.
So let me, let me break down the P&L between revenue and expenses. So revenue, we have occupancy, and we have rate. As I mentioned, on the occupancy side, we're expecting three to five hundred basis points of growth over that period, and that should get us back to what I would call stable norms in the low 90% range. On the rate side, we're expecting 3%-4% average rate growth over that period. I'm gonna break that down, or to use a Bobism, unpack that for you.
So rate is really broken down into what's happening with our existing residents year over year, and then what's happening with our new residents. So when you think about our existing residents, we can break that further down into two components, care and base rate. Let me start with care.
Our existing residents year to year they are getting an increase in care rates as we increase those rates you know at market levels. They're also getting an increase because they're more frail one year later. There's a change in acuity. So when you average those two things together, our care rates are actually growing 10%-15% per year. The in-house base rent, this is the monthly rent, excluding care, has historically grown 4%-6% every year.
We expect this number to continue. There's no reason not to. Once a resident is in our buildings and they see the value proposition that we bring and they see the value of their caregivers, they've been willing to pay these rates year in and year out.
The last piece is what's gonna happen when those residents move out, and we have new residents moving in. So this is the re-leasing spread, okay? So currently, with the supply environment, the supply-demand mismatch, what we've seen is a lot of discounting and a very wide negative variance in the high single digits on the re-leasing spread. And Bob's talked about this for several quarters on our various earnings calls.
And what we're forecasting as that crossover point happens in net demand, fewer discounting, we will see that negative re-leasing spread narrow towards flat. And so that will generate 3%-4% growth. So that's revenue. Let's talk a little bit about expenses. On the expense side, as you all know, we have... Labor is a big component of senior housing.
Specifically, labor represents about 65% of our total expense load in a typical senior housing, and we're talking 100-unit IL, AL-type building, 35%, non-labor. And so when you break those down between its fixed, their fixed components and variable components, and I'll start with non-labor, which is 35% of the expense load. 25% is variable. These are things like food, and supplies. We're expecting those to grow at 3%, adjusted for occupancy changes.
On the fixed side for non-labor, you would have things like insurance and real estate taxes, and again, those are growing at a 3% rate in our model. On the labor side, again, 65% of the expense load, 75% is variable. These are the caregivers, the housekeepers, and the waitstaff that serve our residents. The fixed component is about 25%.
This is the executive director, head of sales, and the other key department heads. Okay? We're growing labor at a 4% wage rate growth. Now, we are factoring in the upside in occupancy, so that is on an occupied unit basis, reflected in our numbers. One last thing on expenses I'm going to touch on, and that's the staffing levels.
You've probably noticed over the last few years, our operators have done a really good job of controlling labor costs on the expense line. We expect them to carry that work that they've done to optimize labor, you know, forward. Moreover, when you look at our occupancy increase, when you get to a point of about 90%, you're virtually fully staffed. So everything above that is really incremental margin.
It's gonna fall to the bottom line, okay? So our margins should pick up, as that occupancy increases. Okay, so the model that we've created, the 4%-6% per year CAGR, that Bob alluded to, this is formulaic. It's a mathematical calculation. It's, you know, occupancy, it's the rate, it's the expenses I went through. But there is an ingredient that perhaps provides some upside that isn't captured, and our secret weapon is really our operators.
So what you'll hear later today from Atria, particularly, is they're gonna show off their best-in-class systems and processes, and you'll hear how they increase lead generation, how they optimize pricing, and how they manage their staffing. And what that should do is allow them to beat the market, right?
So while our model is sort of following market trends, we think that there's an opportunity there to capture market share, and they'll outline that. Now, the other thing that we should consider, while not specifically modeled, there are, you know, possibilities for economic downturns. But what I would say is, when you look at the last recession, you know, ten years ago, what it showed was healthcare real estate, in particular, senior housing. It's a very resilient product.
More resilient than any other asset class. In fact, we didn't have negative cash flows during that entire period. And further, a silver lining, perhaps, if there is a possible downturn, is, you know, we may see a further deceleration in starts, which would help us.
And we actually may see some relief on the labor side. Again, it would help us. All right, so when we bring this together, occupancy is the foundational, you know, factor driven by our analytic data, net demand, and that occupancy is going to drive 4%-6% CAGRs on the NOI line over the next five years. And to bring this all home, back to the first three points that we started with, we have industry-leading data and applied analytics.
Our properties are well-positioned to capture the upside in seniors housing. And we believe that over the next five years, again, using our analytics and our formulaic approach, we should achieve 4%-6% same-store CAGR over the next five-year period. All right.
Thank you, guys.
Yeah.
So we have about ten minutes for Q&A. Hopefully, you enjoyed that session. Certainly, there were some insights in there, hopefully for the group, but happy to take any questions. We've got some microphones in the room. Michael Billerman, right in front. We'll repeat the question. Go ahead.
You talked about refining the model, getting better, right? So that 70.72 regression, back testing the model, what sort of refinements have you made over time? What were the inputs that drove, and where was the model not accurate? And is it, you know, is it a special situation, or can you talk through some of those things?
Yeah.
Yeah, great... Is it on?
Yeah.
Yeah. Great question. Thanks for the question. So you look at every data point in that curve, and you see where the outliers are, right? And you start to look at why are they outliers. It usually has to do with the boundaries of the submarkets, because we start with multifamily submarkets when we build those boundaries.
And as you start capturing actual data of where residents move from and what choices they are making in the competitive set, you can start refining those boundaries. So for instance, real-life examples, you may merge two submarkets and say, now this becomes one, because that barrier is not real. Customers are trading back and forth between, let's say, a highway or an avenue in the middle of the map. So you make those adjustments on a continuous basis.
We have been collecting this data for over two years, so every month now, we get information from our operators about this move-in information, and that allows us to continuously refine as well, if, for instance, there's any change in dynamics of how people are choosing seniors housing. In fact, if you're looking at dense areas where there's a lot of senior housing, that map may contract a bit because the options are all in the same neighborhood. So that's the things, the refinements we make on the boundaries of the map, and the more you make them, the better that number becomes.
Could you give us a sense of how you're integrating this into your investment and asset management platform? How are you using this data to make new investments or even dispositions? And then second question, you touched on penetration. Can you give us some of the drivers of increased or decreased penetration?
Yeah, you want to do asset management?
Yeah, I'll do asset management. And even I'll touch a little bit on Le Groupe Maurice, something that we recently announced. So on the asset management side, when we're thinking about portfolios for, you know, repositioning assets, we are looking at this data, and we're looking at each submarket, and we're making decisions based on, you know, first of all, what do we wanna do with an asset or a group of assets, based on the what the data is telling us?
Is this a first of all a market that we wanna be in? So we have to make a decision from an asset management perspective of, say, keep the asset or potentially sell the asset. Assuming we keep the asset, the next question is: What business model would be the right fit for us?
Is it triple net, or is it shop? Obviously, in the shop asset, where we're exposed to the P&L, it's important for us to have, you know, a good long-term outlook from the submarket that these operators are located in. And the last I would say is the operator. So then we have to say, what is the right operator to take advantage of this submarket?
Do they have the appropriate market share? Can they leverage their real estate in the market? So we're tracking all of those and making decisions to reposition assets accordingly. So from an asset management perspective, that's how we're using the data. On the investment side, we're starting to use it, obviously, to help in our underwriting. We've been doing this for a long time to varying degrees with our data.
But again, you know, are these the right markets that we wanna buy assets, and how does that help us underwrite our NOI? So those are ways that we're using the data. On the penetration, I'll let Ricardo field that one.
All right, so, on penetration, there's not a single factor. Let me just start there. There's a multitude of factors, but I would lay out two very important ones. One is familiarity with the product and the value proposition, so places where you have a history of seniors housing industry, that has been in place for a long period of time, tend to have places where there's more awareness of the product, and therefore, there's more penetration.
The second one is simple. It's just having the right product in the right market. So we see sometimes an imbalance, for example, when you look at ADL needs of the population of a given market or memory care needs relative to the product being offered in that market. So that alone, by offering the right product in the right markets, allows you to also raise that penetration by knowing exactly what to offer.
Yeah, and I wanted to. It triggered a thought in my mind. You know, one of the things that we've done is that we didn't really show off, is within that submarket, we collect an awful lot of data, even that we didn't highlight. For example, we tie to CMS data, and so we track a lot of data by submarket. And one of the projects that we, you know, we've done recently is repositioning memory care.
So if we have independent living product, a wing, let's just say, or an IL/AL building, and we have an underutilized wing, and we want to convert it to memory care. The question is: What's the demand for memory care in that market? Is that the right decision?
By tying the data to CMS data, we were able to link how many dementia patients are on prescription drugs within that market, that submarket. That helps inform, therefore, how much demand there is relative to how many memory care units are in that submarket. Those are ways that we're using this data to make investment decisions.
Mike.
On supply, can you just talk a little bit more about how the model accounts for, you know, the supply impact lingering? So that even if completions are falling, you have product that could take a couple of years to lease up. It could be disruptive, where competitors are trying to poach your EDs. How does that factor into the thinking about supply?
Sure. Do you want to talk a little bit about how we think about supply going forward, and I'll touch on the-
Sure. So we look at actual probabilities of each one of the projects we look at, and we track them continuously, right? So we see how much progress has been made in each one of those projects, how many units, what's the proposition. Some of them are coming from real estate data sets, some of them coming from simply calling and finding out more information about that development. And by tracking those and working with our operators, we can assess to what extent their competitive threat will or will not bring an impact in not only our staff, but our prospective residents.
Right. Yeah. You know, and I'll touch a little bit on... You made a comment about, you know, new competitors coming in. First of all, you're right. Lease-up takes may be 18 months, and so that is factored in. You know, we have starts coming in, leasing up all the time. So that is factored into our occupancy forecast and net demand.
But, you also made a comment about poaching EDs. I would say that, you know, that does happen, but the advantage that we have, with our larger operators, our larger, more sophisticated operators, we have better comp, better benefits. We also can backfill positions very quickly. We can have regionals fill holes, and that really only comes with the benefit of these larger-scale, best-in-class operators like Atria. Small guys can't do that, and they may have a hole that they have to fill an ED for months, and that will devastate your community.
In the range, I would add, the range four to six takes into account, for example, timing of deliveries, what's the competitive impact, and how quickly that re-acceleration happens in that context. So there's some variability in there, and we've built the range on the back of that.
Yeah.
How does the model account for qualitative data, like, age of a property, the amenity set that's offered, and the perceived quality of the operator running a particular facility? I mean, I would imagine that could also flex things like trade areas.
Yeah, I'll field that one. You know, so I mentioned that, when we built the five-year P&L, it was really market-based. Occupancy, for example, we're assuming, follows the market. And I think our operators, Atria, Sunrise, these are, these are operators that have a great reputation in the market. They may gain market share and have a faster pace than, you know, than others.
And so, and I would add, as far as other qualitative measures, you know, our shop portfolio, we keep very well-maintained. You know, I feel as though that, you know, it doesn't matter really when the building was built, it's what's the effective age. We put money into our building to make sure that they're well-maintained and that they, you know, are still an A-type product. And so when you think about SHOP, you really shouldn't focus on the age as much as the effective age.
One of the insights from this data as well, you mentioned where we lost two, and where the competitive set is, is understanding the reasons, qualitative reasons why people chose one building versus another. Was it, you know, the real estate? Was it the operator? Are there things we can do through redevelopment or with the operator to make sure that we're gaining share and winning that consumer? So there's insights through that data that we're using at the operational level.
Yeah, one of the things we didn't show, which I think is interesting, we track every unit based on its unit quality. So within our shop portfolio, we grade every apartment as an A unit, a B unit, a C unit, okay? A units might be, you know, newly upgraded, close to the dining room or the elevator, good view. C units might be maybe at the end of the hallway. And so what we see in the data is that the A units actually do very well, right? People want the best unit. The C units actually do very well, especially for the in-house residents that age in place.
You know, as care becomes a bigger portion of their spend, as they become more frail, they actually, you know, may downsize to a smaller unit or, you know, a less upgraded unit in order to maintain their ability to stay in the building. So we're always looking at those insights. Amenities are important, unit quality is important, and it's all factored in.
Chris, you touched on care. I just wanted to follow up on that. So how does turnover impact the 10%-15% annual, you know, in-house care rates? And does care become a bigger component of revenue of, of these properties over time, or is it sort of constant? And then, as a follow-up, I'm just curious if you have thoughts on or you can give us some insight in terms of the average move-in age that you guys are assuming?
Sure. So when you say turnover, are you referring to resident turnover or caregiver turnover? Resident turnover?
Resident.
Yeah. So, you know, when I think about care, you know, you don't have just one person at the highest care level moving out and, you know, the next person coming in at the lowest care level. It's actually like a, you know, stairstep. So, you know, you've got residents who are moving from care level one to care level two, then care level two to care level three, so it's a constant sort of escalator, if you will. And so, you know, that's factored into our re-leasing spread. So when we say we're approaching the negative, it doesn't mean that our new residents are paying less on base rent, for example, than the prior resident.
We're growing the street rate or the move-in rate, you know, 3, 4, 5%, but it's the care flip, the turn, that's actually, you know, keeping it in the 0 to -2. But, you know, care, I don't think because of that escalator approach, isn't necessarily becoming bigger every year. It just represents, you know, a blended growth that gets us to the 3%-4%. So and then you had one more question on move-in age.
Yeah. So the move-in age follows the curve that I showed you, so the average there is 85. One interesting fact is that, that age, that average age, has not changed dramatically over the years. It has been fairly consistent. What is interesting, though, is that you see a lot of growth coming out of the 75-84 cohort. Sorry, there's a fly here. 75-84 age cohort. So if you can address that particular cohort of the population with the right to manage and the right product, you can outgrow the market on average as well.
I think we have time for one more. Rich Anderson.
First of all, do you think two years of data is significantly, statistically significant, in terms of, you know, how you're thinking about this approach? And second, of the regression analysis that you did, how much of the miss was where you underestimated performance, and how much of it was where you overestimated performance? And in those cases, where you underestimated performance in a given asset, are you equally upset about it? In other words, you know, because you missed it and you didn't understand it, it doesn't matter if it did better or worse than your prediction.
Yeah. Let me start by saying that the two-year comment really was just the move from addresses. Our data goes back, you know, almost 20 years. We're talking P&L data, we're talking rent roll data. That goes back very far. The move from addresses is something that our operators started collecting about two years ago, and that's the data that's really helping us tweak the submarket boundaries. So I don't want you to think we're only using two years' worth of data, but even within that two years, I mean, it's a fairly decent amount of data that helps us refine the submarket. And the second question, I think-
Variability over/under on the.
Yeah. So you saw the-
Demand.
You saw the R squared, right? And you saw that line. So obviously, when you track, if you were at a perfect 45 degree angle, you would be exactly precise. So in other words, you know, we predicted it to be here, and it was here, and it would be right on the 45 degree angle. And so when it's above that, it did better, and if it was below that, it did worse. And when you, I don't know if I can go back to that chart, but I think what you saw was an even spread of slightly above and-
There was a bias.
To what?
There's not a bias.
I mean, you're equally, you know, like, if it's whether you underperform or underestimate or overestimate, it doesn't really matter to you. In other words, it's-
Well, you know.
Yeah, we like to be accurate.
Yeah, we certainly.
And we were accurate, you know, 72% of the time, so.
Right.
That number keeps improving.
And where we weren't accurate, you know, sometimes we're better, sometimes we're worse. But, you know, I will say that we've been giving guidance for SHOP, you know, for years, obviously, on SHOP, and I think we've done a pretty good job of hitting the numbers that we told you we were gonna hit using our analytics, so.
That's a good place to close. We're out of time.
Yeah.
Thank you very much, senior housing team.
Yeah. Thank you.
Thank you.
Thanks, Bob, Chris, and Ricardo. Next up, we're gonna hear about our exciting research and innovation portfolio you've heard so much about yesterday, but today, we'll bring it to light from the Ventas perspective, so I invite the panelists to come up. Peter Bulgarelli will be the emcee for this panel. I'll let him introduce everybody.
I'm Peter Bulgarelli, and I'm happy to be here. I lead the office segment for Ventas, which includes the R&I portfolio, as well as the medical office portfolio. And I'm happy to say that I just passed a big milestone. I've been now at Ventas for over a year, so it's very exciting. And I'm really happy to, and actually feel very fortunate to be with such a talented group of people.
We have a terrific platform, and most importantly, I'm extremely excited to be part of the future growth of Ventas. The future is very bright. So today we're going to talk about research and innovation, and let me introduce our panelists. So next to me, Jim Mendelson, key person on our team. He leads the office asset management function, which includes, once again, MOB, as well as research and innovation.
At the end is John Cobb. Many of you know John. He's our Chief Investment Officer for the firm. And in the middle is Will Germain, critical person for the team. He leads our R&I acquisition efforts and probably has the best job in the company. So we're really excited to have them all. So we're gonna talk about three distinct things today. First is, what is our excitement level?
Why are we so excited about the university-based life sciences business as an investment opportunity for Ventas and our shareholders? The second is, we're really proud parents, and we wanna talk to you about the performance of our existing portfolio. And the third piece is, we are incredibly excited about the future. We wanna talk to you about why that is. And because of our announcements yesterday, the future is now. So we can provide much more disclosure on what the future looks like going forward.
So first, let's talk about the market itself. The first piece of good news is that the market for life sciences real estate is very large, $140 billion. If you kinda think about the two bookends of the marketplace, you have the university-based, highly entrepreneurial, venture capital, startup, incubator space that we've seen, you know, yesterday.
On the other side, you think about the sprawling campuses in New Jersey, the very established Pfizer, Merck, Bristol- Myers Squibb-type campuses. In the middle, we have these cluster markets, which is a combination of the two, entrepreneurial, university-funded, but also established pharmas integrating with these the very entrepreneurial aspects of the university-based life sciences. As you know, Ventas has chosen to participate primarily on the university side, as well as key cluster markets such as Philadelphia.
The second piece of great news is that not only is the life sciences real estate market large, it's growing quickly. It's expected to grow 20% in the next couple of years, by 2023. There's two primary drivers for that growth. The first is demographics. So Chris and his team talked about demographics quite a bit already in the previous sessions, so we won't go through that.
The fact is, United States has an aging demographic, which drives an exponential increase in chronic illnesses. That's demand for pharmaceutical and biotechnical solutions to maintain a quality of life. Second piece is technology, and we, and our panelists yesterday talked about that. Never before has there been such an acceleration in, in basic data analytics and basic sciences to drive so much change within the life sciences business.
Never before have scientists been able to create such specific cures at such a low cost and at such a fast pace... You think about terrific demand, technology intervention, that means great business. I'll tell you just two data points. In two thousand and six, there were 33 life sciences companies that had a valuation over a billion dollars. Today, it's over 112.
Back in two thousand and ten, venture capital investment in life sciences was here. It's now doubled compared to what it was in two thousand and ten. So we're excited. Business is good in the life sciences business, and we're happy to support that business through our real estate efforts. You also heard yesterday about the importance of these ecosystems to the life sciences, within life sciences, in the university setting.
So that's obvious. We understand it. The question is: Why do we like this? Well, we like the university partners for a couple of reasons. One is they have incredibly long-term perspective on the success of these ecosystems. They also are happy to have a long-term perspective on the real estate, which we really like.
We really like their credit ratings, and I can't think of a better anchor tenant on university property as a magnet to draw other uses to fill up our buildings. So we're incredibly happy to have partners that are the universities in this life sciences market. The final piece that I'll touch on is really the future and why we're so confident of the future. An awful lot of it has to do with our unique partnership with Wexford, which gives us a durable competitive advantage, and we have a video to describe that. Can you play it now?
Research and Innovation represents a large, dynamic, and growing market opportunity with strong risk-adjusted returns. Wexford and Ventas have a dominant market position and a competitive advantage, with Ventas as a permanent long-term capital partner and building on Wexford's long history in the space.
Ventas has become an increasingly important partner in terms of the pretty hard and pretty complicated financing of making these individual projects go. They've been a flexible, thoughtful, and committed capital partner, and I think our relationship is strengthening over time as we do more of these deals. When you pair us together, it's a powerful message, and it's hard to believe anybody could create a stronger message when you're selling your opportunity to the university.
Good morning. I'm gonna talk about the existing portfolio, and I wanna draw a distinction between the assets I'm gonna talk about from the pipeline that you're gonna hear about from Will. I'm gonna talk about the operating portfolio. The university-based R&I portfolio has grown significantly over the last three years since we got into the business.
Today, it's 33 assets, 13 markets, and $2.2 billion of invested capital. 95% of these assets are affiliated with the major research universities in this country. All the assets are either newly constructed or newly renovated, and we have a very, very strong 9-year weighted average lease term. All of our... Not all, but the lion's share of our university partners have terrific credit profiles as well.
Since we got into this business, when we invested $1.5 billion through NOI growth and cap rate compression, we have created a significant amount of value for Ventas shareholders. The current yield on the $1.5 billion initial investment is north of 7%. This portfolio, these assets, this business, produces high-quality, growing, reliable, stable cash flows, and we are privileged and honored to partner with some of the elite universities in this country, including Duke, WashU, Yale, Penn, Drexel, Wake Forest, and Brown, just to name a few.
The portfolio's performed pretty well financially as well. 2017 versus 2018, NOI, total cash NOI grew 21%. We're expecting strong growth again this year of 7% or better. Within the 33 operating assets is the same-store portfolio, and that's off to a really good start in 2019.
Q1 same-store NOI growth was 12.9%. And this portfolio has consistently enjoyed very high occupancy rates in the mid-90s, which, for those of you that have trafficked around other commercial assets, is a phenomenally high occupancy rate. Since we got into this business in 2016, NOI has grown at a compound annual growth rate of 19%. We are very intentional about the universities we partner with. All of them enjoy a very high level of support from the NIH and are investment-grade credit-rated or better.
If you look on the right, it's kind of an enhanced version of the box on the left, and what you see is that the 13 universities, again, Penn, Duke, WashU, Pitt, Yale, Drexel, they're all in the top 5% of NIH funding, and those that are in the upper tier are in the top 1% of NIH funding, and that's pretty important to us because more NIH funding drives more research, which drives more need for research and innovation space, which speaks well for the portfolio that we've assembled.
Ventas has made pretty large strategic investments in certain asset classes in the past. From 2010 to 2012, Ventas invested $2.5 billion in medical office buildings. That was at a period of time when cap rates were 7% plus.
Since that time, cap rates have dropped pretty significantly, and NOI has grown as well. That investment strategy yielded tremendous dividends and value creation for Ventas shareholders. Ventas has done the same thing in the research and innovation sector. We've invested $2.2 billion. There's a 7% yield on our original investment, and as a result, we've created significant value for our shareholders.
These properties, again, produce stable, growing, attractive, risk-adjusted returns. Most commercial asset owners don't really look forward to the opportunity to get space back due to contraction or just natural turnover. I would say we feel otherwise with this portfolio. This portfolio, when we get space back, it creates opportunities for us.
We have been able to re-lease space at longer terms, higher rates, and with better credit during the few infrequent opportunities when we've had the chance to get space back. You can see on the left, we have grown occupancy 110 basis points over the last three years. That, combined with the M&A that is affecting some of our private sector tenants, like a Paragon and a Spark, has improved the credit profile of our portfolio as well. Before I turn it over to my colleagues to talk about the exciting pipeline, just gonna go through the evolution of these knowledge communities, and you heard a lot about it yesterday, so I'll be brief.
The two most mature knowledge communities in our portfolio are right here, affiliated with Penn Drexel in Philadelphia and Wash U, what we call Cortex in St. Louis. It really all starts with the university, and in some cases, it's academic medical center. The next phase are the startups, the VC-funded startups. Then comes pharma and biotech, and lastly, you get the big corporates who want to draft off the innovation that's occurring in these buildings and have access.
And you heard it from the panel yesterday, they want access to the talent pool. These knowledge communities, the catalyst is clearly the universities, but once they get going, they become self-sustaining ecosystems that just continue to grow and prosper, and you've certainly seen that here yesterday and today in Philadelphia.
I'm gonna turn it over to Will Germain, who's gonna talk about the pipeline and the growth opportunity.
Thanks, Jim. So, very excited to talk a little bit about our near-term pipeline. This is the $1.5 billion development pipeline that we previously announced, as well as talk about some of the opportunities that we see to growth beyond that originally announced or that previously announced pipeline. So yesterday, we had big news. We announced $800 million in new development.
This, these are projects that are being developed with our exclusive development partner, Wexford Science and Technology. Wexford is the premier and leading developer of university-based life science research and innovation space. These four projects are all university affiliated. They are both with existing universities that we are doing business with, as well as new relationships, like University of Pittsburgh and the UPMC Health System.
These will be four Class A, LEED-certified buildings that will house research and innovation in science and medicine for some of the top universities in the country. So in aggregate, we're adding about 1.3 million sq ft to our growing research and innovation portfolio. That's roughly a 20% increase to the existing portfolio.
And really, the growth and development really would not be possible without the strong demand that we are seeing or the strong tenant demand that we're seeing in each of these respective markets. Pete talked about the growth in the life science industry and in the market, and you're seeing some of that growth coming to fruition through these projects here. So our first project is in Pittsburgh, where we're creating an innovation hub that will house the Immune Transplant and Therapy Center.
This is a new collaborative center of excellence, Debbie's hometown. Shout out there. This is a new collaborative center of excellence between University of Pittsburgh and the world-renowned UPMC Health System. University of Pittsburgh ranks in the top 1% of NIH funding, and this particular facility will be one of the largest dedicated immunotherapy centers in the country.
This particular center will house state-of-the-art wet and dry labs for bench research in chronic diseases, organ transplants, cancer, and the biology of the aging. We're extremely excited about the ecosystem that we are helping our partners create here, and we really believe, you know, this building will help our partners tackle some of medicine's greatest challenges, and we're really excited to be a part of that. The second building is in St. Louis. This is 4210 Duncan.
And here, we're essentially meeting the strong demand that we've seen from academic and corporate clients within the Cortex Innovation Community. Our partners at Washington University, who also rank in the top 1% of NIH funding, have really been an integral part of the growth within Cortex, within the Cortex Innovation District.
And so, like, the past ten years, the district has grown from 35 companies to over 400 companies and almost 6,000 employees, so explosive growth there, and you can see the economic benefits and impact that knowledge communities create within these cities. St. Louis is a very strong market. This innovation district only has 1% vacancy compared to 5% in the submarket. Our portfolio in this market is 99% occupied.
That includes a building that we delivered last summer, which is already 100% leased. So we're trying to meet this supply-constrained market by delivering a new 320,000 sq ft innovation tower, and this is scheduled to open in 2021, and our corporate and university clients are telling us that this building cannot come along fast enough, so we're working hard to accelerate that project.
The next two projects I'll talk about are right here in the growing University City submarket. So you've probably had a chance to see where these projects are going to be located. The first one is One uCity, which expands an existing mature knowledge community, and you've heard from some of the prominent members of that community, who had a chance to tour this building and walk Market Street.
So by now, you probably have some familiarity with kind of what we've created here and what makes this particular district so special. We are surrounded by some of the top universities and healthcare institutions in the country, and they receive roughly $700 million of NIH funding annually.
So what we're trying to do, we're trying to address the strong demand from tenants that we've seen here while building on the rapid leasing success that we've had in this particular building, which is already 97% leased after opening just last fall. So we're essentially out of space in the projects that we have in this market, and so this new 390,000 sq ft facility that we're planning in uCity is, you know, we believe, desperately needed.
We're seeing substantial demand from our existing tenants within our facilities who are looking to grow and expand, but we're actually also seeing demand and interest from new prospects, like Amicus, who want to come to uCity and be a part of this thriving innovation district and be a part of the connectivity and the collaboration that happens between the university and the corporate center, sector.
Our second project in uCity will be a state-of-the-art nursing and health education facility that brings Drexel's growing College of Nursing and Health Professions to uCity from Center City, where they're currently located, and this pretty much brings their nursing program into one consolidated location, so we're happy to help them bring that activity into uCity.
This particular building will help improve the collaboration that the College of Nursing has with the other schools that Drexel has, but also the collaboration that they'll have within uCity and the activity happening in uCity, so we're proud to be a part of that. So this will be an iconic new facility. It will be a magnet for faculty recruiting and student recruiting.
It'll be 100% leased by Drexel on a long-term basis, and we're really excited about that project as well. So you heard a little bit about the four projects, and we have a short brief video to bring these projects to life. Great. Those beautiful buildings. So in aggregate, including the previously announced ASU project and yesterday's announcement, we've launched roughly $875 million in projects.
This is towards the previously announced $1.5 billion, so we are more than halfway through that originally announced pipeline. Remaining, we have roughly $625 million in projects. However, we also see significant opportunity for growth beyond the $1.5 billion in development projects, which I'll talk about in a little bit. So in terms of the remaining $625 million, we expect those projects will commence over the next 12 months.
They are with both existing university relationships and new university relationships. These projects are all in various stages of development, from schematic design to CDs, and we are in various negotiations with university clients as well as corporate clients, and so we look forward to sharing more details about those projects as they unfold.
So now I want to talk a little bit about the opportunities that we see beyond that originally or that previously announced $1.5 billion pipeline. We continue to see significant development opportunities, both with existing university clients and new university clients. This is both on land that we own and control, like the land you toured or saw yesterday behind the Pocket Park and on 38th Street and on 34th Street.
But we also see opportunities for development on land that our university partners own and control, and the Drexel College of Nursing would be an example of that. And then lastly, we continue to see significant acquisition opportunities both in existing markets as well as new markets. So touching on the large opportunity we see to expand with our existing university relationships.
So here is a map of where our land is. You'll see some of the universities that our land sits adjacent to, Brown, Penn, Duke. And so on land that we own and control, we can do up to $3.6 billion in development. So that's a big number, and this is on top of the $1.5 billion dollar pipeline that we previously announced.
I just wanna make sure that's clear. On top of the $3.6 billion dollars, we have an additional opportunity for growth with our on land that our university partners own and control. So this is all on top of the $1.5 billion. So you'll see, we have a very significant opportunity to expand in development with our existing university relationships.
And here really is the most exciting part of my job, is the growth opportunity that we see with new university relationships. If you look at our current portfolio, our university partners make up about 10% of NIH funding. And we are in several discussions with new universities who want to develop and bring knowledge communities, like the one you see here, to their cities and their markets.
They want that connectivity, they want that collaboration, and they want that environment within their cities because it drives economic growth as well as some other benefits. And so we're actively in discussions with new university partners. And the other growth opportunity we see geographically is on the West Coast as well as the South, and we're actively pursuing those opportunities as well, and more to come on that.
So in closing, we have a very clear path to growth. First, our university, the university-based life science market is very large and growing, as Pete mentioned earlier. Our portfolio on the research innovation side is performing well. We have a high-quality portfolio with strong credit tenants, long-term leases. The portfolio is delivering great returns.
We've created substantial value for shareholders. And lastly, the Wexford and Ventas advantage is really uniquely positioned to gain market share within this space. Combined, we have the longest track record, we have long-standing university relationships, we have deep market knowledge of this space, and we have the ability to scale, which we've proven to do in other asset classes time and time again. So that's all of the remarks we have. We're open up for questions.
Oh, sorry. I'll just hold it. A little uncomfortable. She won't get away from me if I ask a mean question? Can you talk a little bit about sort of new markets, from the standpoint of you see some of the research leaders still untapped. A lot of those are core life science markets where the cap rates are very low, right?
So you think about San Francisco, Cambridge, where you just bought in a four cap range, New York, Seattle, San Diego, Maryland, effectively, almost like the Alexandria submarkets. So I, I guess, how are you approaching doing deals in those markets where, the initial returns are gonna be a lot lower than what you are able to achieve on the university side and some of these other markets? And how should we think about the company potentially pivoting and doing more of that as you build out the life science platform?
Yeah. I mean, I think we're doing both. I think we're partnering with a lot of the universities, so a lot of the universities. Like, there's probably been ten universities have come to this building alone just to tour and see what's going on here. So we have a lot of those great connections.
So it's not just MIT and Harvard, it's also the ASUs of the world, the USCs of the world, the Stanfords of the world, where they want to understand what we're doing here and also want that there. So they want the CICs of the world or the BioLabs or the Science Center partnership. They want to see that and replicate that. So, I mean, I think we're doing both.
But how aggressive are you gonna be, John, in going to those markets where the cap rates are just so much lower than what you achieve on the development side than what you present? Like, how many more of these Cambridge deals, where you're doing a small acquisition at a low cap rate, do you envision adding to the portfolio?
You know, the primary focus has been what we've been doing with Wexford. The 10 Mass deal that you'll hear about later today, too, it's just a small deal. It gives us a good window into that market. I think as we learn more and see more, we will look at those markets and do more, but the primary focus has been this Wexford university relationship, where we're getting great yields with good customers, with great credits. We have an unbelievable land bank and unbelievable partnerships with these universities, and that's been the primary focus where we've been.
You quoted a 7% yield approximately on your original investment. You bought it originally at 6.8%. Shouldn't that be a number closer to 7.5%-8%? And also, you quoted a 5% cap rate. I was wondering if that was a true market cap rate for these assets today, or if that's more of a theoretical number?
The original investment also includes the investment that we've added during our period of ownership, and we have continued to grow NOI, but we've made additional investments in those assets. And the 5% is our estimate of what similar assets would trade for in today's environment.
So just wanted to follow up. Can you hear me? I wanted to follow up on the life science investment that we were just talking about with Michael. Is there a goal eventually to build out an in-house life science management platform?
Not in the immediate... You know, we have a platform. We have people that work with us that do this, but we really have enjoyed our partnership with Wexford and continue to want to grow that, so.
This is Mike. Can you talk a little bit about the spec versus kind of pre-lease, how you guys are thinking about that in the various markets and how that might change over time?
I mean, as we go through these portfolios and start the construction of them, or as we're in the development phase of them, you know, we're constantly talking to the university partners. Some buildings are 100% pre-leased. Some of them, like the WashU building that we just completed, was 50% pre-leased, and it was basically full within three months of opening.
So we're at in various stages, and every building's a little bit different. I mean, this building here was 50% pre-leased, and we're basically other than the restaurant downstairs, you know, we're basically 100% occupied within nine months. So. And that's how we're looking. We're constantly talking to both corporates and universities and feel very confident.
You've talked a lot about the partnership with Wexford, and different from when BioMed made the original purchase, where they integrated Wexford into the entire company, taking all the GNA and having effectively the in-house developer, gone to the partner model-
Right.
Similar to what you have with PMB, and Atria, and Ardent. How should we think about the balance sheet at Wexford? So how much skin in the game does Wexford have in your assets, number one? And number two, where do they stand currently in their promote, given the success that you've had in driving the NOI and the above-average developments? How should we think about those two things?
Great. Well, thanks, thanks for that. So we've had a great, you know, long-term history of partnering with people like Atria, PMB, Ardent, and now Wexford, and now soon to be with Le Groupe Maurice, where we've allowed them to have their own company.
They will partner with us in a building like this, and we'll do a classic real estate joint venture, where they put in, you know, somewhere around five to sometimes a little bit more, sometimes a little bit less, depending on how much dollars there are. But they will put in skin in the game. They will help us develop the building, and then as that building fills and grows and prospers, then they get a promote over certain hurdles. But they're classic real estate level promotes.
Where do they stand currently in terms of the amount of capital that they have co-invested with you, and where are they in the promote cycle, given the current performance since you've acquired them?
So in this one, let's say, so this is the first building we have built with them as between Ventas and Wexford. So we're not, as you saw last night, we haven't built out Amicus. But I would think that once they occupy space, and they may wanna wait till we get that restaurant before they trigger, but they have a right to,
Yeah
... to trigger when the building is stabilized. So they may say, "Let's hold on for a while, and let's see these rents grow as well." So, they're very committed. They have a, you know, fairly... You know, they did make some money on the BioMed deal, so they have capital to invest. And we have a healthy pipeline with them, so they've been really good partners.
So when it comes to putting together the tenancy of these buildings, some of the collision opportunities that were talked about yesterday make clear sense between universities and, you know, some of the pharma companies, but some aren't as obvious.
And I'm wondering, you know, I don't know exactly how to phrase the question, but how do you manage, you know, the opportunity set for your tenants, and how much does the university have a say in terms of how you tenant some of the buildings so you maximize this sort of collision opportunity between the different parties within the buildings? 'Cause I can imagine that could become somewhat complicated to do it right.
Yeah, I think, typically, you know, it depends on the project itself. So in some regards, the university doesn't have a specific say in who we actually put in the building. In some cases, they may have, you know, the right to direct some of that. But really, I think, just taking a step back, I think the companies that are coming into these projects and that wanna be close to this activity, I think it really starts with the talent pool.
And so even though it may not make, you know, exact sense that, why is this company here with, you know, this university or whatever, I think these companies all are looking to draw from the talent pool that these universities provide, and so that's kind of how I would think about it. And there are specific collaborations that happen, like Amicus and Penn, for example.
...But, you know, in instances where there might not be a specific collaboration, these corporate companies want to be close to the activity because they want to be close to the talent pool, right?
Sure.
And then there are others who want to be close to that activity because they want to be close to the startups. They want, they want kind of insight into who's growing and what's going on within some of these early-stage startup communities.
It was almost the opposite of what you said. The Penn called the science center to help say: "You have to help us get Amicus to move to Philadelphia." Penn was asking us. So when Microsoft moved into our new building-
Yeah
at the WashU campus or the Cortex campus, you know, Hank, who you saw in the video, was selling Microsoft almost more than we had to sell them.
Right.
We had the space, but the university is trying to get that tenant, Boeing, who they were dying for Boeing to expand into the Cortex district. So you have Hank and that partnership with Cortex, or it's Penn and Steve, who you met yesterday, selling those customers to put them in our buildings. And that's what we really like, that great partnership with those innovation districts that help us get those tenants. It's almost the opposite.
I think we have time for maybe one more question.
Yeah. What do you have to see to break ground on some of these sites? What type of anchor tenant do you actually need them to have to lease the space? And I think the asset in St. Louis that you just announced, that's a spec project, right? But you said that the tenant can't have the space fast enough. Could you get more aggressive breaking ground on some of these projects? I guess, what are you seeing in the market?
So in some buildings, we have, you know, great pre-leasing with Drexel and/or the University of Pittsburgh. In St. Louis, we had such great success with 4210 that we know we're going to go forward. We formed our JV. We're in active talks with a fair amount of tenants. We will have some leasing before we break ground, so I don't see us going, you know, 100% spec there. But I do see we do have active negotiations with a fair amount of customers to lease. And then in the markets that we know we're going forward, we have had wonderful success, both at the WashU and here in Philadelphia at U City. So...
Good. Thank you very much.
All right. Thank you.
Okay, so now for some fun. We're gonna take a short break, but at 9:55 A.M., so five minutes till 10:00 A.M., we're going to reconvene, and we're gonna break up into groups again. So hopefully, you either remember your colors or you still have your badges. So we're gonna break out into three sessions again. So the color dots will be as follows: The red dots are gonna head upstairs to the third floor, the Delaware River Room, and you're gonna go with Sarah Woodford, to my left.
Sarah, raise your hand. Thank you. So Sarah is gonna take you to that first breakout again in 15 minutes at 9:55 A.M. The blue dots will head to the tenth floor, to the Drexel Academic space, and you're gonna go with Kate Kazin, who's on the back right, blonde hair. She has the microphone. Michael, you know her.
So you're gonna follow. And there, you guys are gonna see Seniors Housing Operating Excellence. That's gonna be an Atria panel. You go upstairs again at 9:55 A.M. And the yellow dots will remain in this room, and we're gonna do the next session in 15 minutes, the Core Triple-Net Growth session. So take 15 minutes, use the restrooms, grab some refreshments, and find your tour group leaders.
Thank you very much, ladies and gentlemen. Fred Henke on piano. Neil Swainson on bass. And Alex Deutsch on drums. And very truly yours, Woody Shaw, trumpet. We'll have Chris Cummings and Jason Simmers. I'll hand it over to Chris to introduce the panel.
All right. We good?
I think we're set.
Hello again, everyone. So Chris Cummings, again, Head of Asset Management for Senior Housing. That includes SHOP as well as the triple net portion of senior housing. Just a reminder, 17 years experience at Ventas. I'm here with Jason, who will introduce himself, give you a little background.
Yep. Good morning. Jason Simmers. I'm the Head of Asset Management with... on the health systems and post-acute portfolios. I've been with Ventas for three years, in the healthcare REIT space for seven years, and I've been in the healthcare and real estate industries for 20 years.
Right. Yeah, and again, we have a great group of people back, holding down the fort, including Gary Hunter, Lee Eisenstein, and Trevor Sweeney. Okay, so three things that you need to take away for triple net. First of all, it's a large, diversified portfolio. It's well-structured from a lease and agreements perspective.
And for senior housing, as I mentioned earlier in the SHOP section, with the fundamentals and how we position the portfolio, it's well positioned to benefit from the demographic tailwinds that are coming. And so what that means for you, as we think about the buildup of the Ventas growth story and the pivot to growth, this portfolio of triple net is expected to grow 2%- 2.5% CAGR over the next five years.
Okay, so when I said diversified, what does that mean? It's diversified many ways. One of those ways is by asset class. So, we'll present this really in three groups of asset classes. So we've got acute, we've got post-acute, and we've got seniors housing, and within that, we have a variety of different subtypes. The other point here is the escalators.
Again, triple net leases, this is all about the annual rent growth each year. Our escalators contractually will increase 2%-3% per year, and that represents on our base of $717 million this year, about $20 million a year in cash growth off this portfolio. One last point I wanna make on triple net is we do have very long lease maturity.
So you can see by the chart on the right, you know, we really have no material amount of lease maturities until 2025 , which is great. So that means that, you know, this portfolio, you know, should hum along. So senior housing. So in addition to being diversified by asset class, we're also diversified by tenants. On the senior housing side, we have 30 different operator relationships. $428 million of our total triple-net NOI is on senior housing. Brookdale represents about $165 million of that, with Holiday just shy of $60 million, and the other senior housing tenants represent just north of $200 million.
Each of those tenants, when you think about its contribution to total Ventas NOI, represents 1% or less of the company's NOI. Senior housing, geographically diverse, 40 states and the United Kingdom, and again, diverse pool of operators, acuity levels, social model versus medical model of assisted living. We have memory care. We have independent living operators like Holiday, so very diverse. And then on the healthcare side, I'll let Jason talk a little bit about that and go through our acute and post-acute triple net portfolios.
Sure. Thanks. So the other 40% of our triple net portfolio is made up of our health systems and our post-acute portfolios. It's diversified across eight operators. Most of those are large public companies. It's also diversified across four asset classes, which spans the spectrum of acute care. Our portfolio is made up of about $300 million of annual rent that comes from these two portfolios.
That's primarily driven by our Ardent and Kindred relationships, and those are. That's where I want to touch on this morning. So we'll start with the health system portfolio. That's predominantly driven by our Ardent relationship, which has been an incredible success story. It's been one that has probably been the most active and most successful operating partner I've ever worked with.
They've done it in a few different ways, and I wanted to touch on some of the keys of their success and also our partnership. What they're really good at is executing on a unique joint venture model. They look for not-for-profit and university hospitals that are leaders in their markets, that have really strong market share, really strong branding, and when they can find the right partner, they go in and partner with them, and they can jump right into that strong market and branding.
Then they're able to layer on their operational expertise and drive margin, and they've been really, really good at that. If you've ever been a part of a major acquisition, you know it can be a monumental event. They're really good at executing on that plan, but also the post-integration, right?
Integrating that new acquisition can be really tough, and they've been really good at the corporate level and out in the field in the health systems. So now they're in the market, and the second thing they've done really well is drive consistent, stable, organic growth. They do that in a lot of different ways, but one thing that they're really good at, they're experts at, is that they're able to cultivate the volume in a market, right? They do that through a lot of access points.
They get people into the system. They do that with strong physician relationships, both on recruitment and retention, and that drives a lot of volume. When you do that, you're able to incrementally increase your clout in the market. That drives rate, and what you end up with is outsized revenue growth and really strong margins.
What we've seen is that Ardent's been able to drive consistently strong performance that is at the top of the industry when you compare them to the public peers. The third thing that they're really good to do, they're really good at doing, so they're into the market, they're driving organic growth, they double down on that organic growth by investing in the market.
Right, so they invest with technology, new sites of care, new types of equipment, and they create new access points to continue to grow that volume. And those are ways that we've participated along the way since the sale lease back. And then the fourth thing is what pulls it all together, is that you've got a really strong, talented, seasoned management team that has a proven track record, that has done this over and over and over.
What we've seen over the last four years is they've been able to double the size of the company, and now they're one of the largest private for-profit health systems in the country. It's that success that keeps driving our confidence and our willingness to keep investing with them since the original sale- lease back, and we've done that in a variety of ways.
The most recent example would be a really large outpatient cancer center in one of their core markets; we're funding that. We're funding a new development, and that'll be a new access point to continue to double down on that organic growth that we're already seeing. We really like Ardent; we really like their management team, and we have a really strong outlook for the company going forward. Let's turn to post-acute. This is also a success story.
It's just a very different path to get there. But there's one common theme throughout our health system post-acute portfolios, which is really strong operating partners with really strong management teams. And really strong operating partners can do a lot of great things, but there's two that I would highlight. One, is that they're really good at taking advantage of market opportunities, and that's the Ardent story.
Two, they're really good at navigating industry pressures when they pop up, and that's our Kindred story. Kindred makes up about 80% of our post-acute portfolio, and they saw pressures in 2015 when patient criteria was introduced. Patient criteria, most of you probably know, was a negative reimbursement pressure that came in on a portion of their patient population. They had to put a plan in place to mitigate that.
They had to execute that plan over a couple of years, and what they've done is come out on the other end with positive growth again. That's a real testament to Ben and the team, both at the corporate level and at the field, for them to be able to execute on that plan. That positive growth is in line or exceeding our rent growth.
You see the results of that on the left-hand side of the slide, where you get consistent, stable coverage from that. We even saw an uptick in the fourth quarter. Likewise, our skilled nursing portfolio has seen stabilization. It's still only 1% of the company's NOI, but we were really pleased to be able to extend our lease with Genesis through 2026 in the first half of the year.
We did it on the same rent escalator terms, and we were very pleased with that. If you take that extension and combine it with the long-term contracts that we had in place across the health system and post-acute portfolios, 90% of the NOI matures beyond the five-year window. We're really pleased to get that done.
When you pull all this together, we really like the outlook of the health system and the post-acute portfolios. We've got long lease maturities, we have really strong operating partners and corporate lease support, and we have really good, consistent, strong operating financial performance underlying our leased assets. That's why we would expect there to be strong, stable NOI growth over the next five years on this $300 million of rent. I'll go back to Chris.
Yeah, great. So back to senior housing. So, I'm gonna start with just framing senior housing at the industry level. Earlier in, the shop section, we showed you, the shop version of this slide. Now we're gonna show you our triple net portfolio version of this slide. And as a similar story, as you would expect. We've got a return to growth coming.
We've got a crossover point, where demand is outpacing supply, and that's coming soon, right? So what that means, similar drivers to the underlying P&L at our triple net operators, we're going to see occupancy growth. And most importantly, over time, we're going to see, that occupancy growth translating to, should translate to EBITDARM growth and then a rehydrating of coverage, which we're excited about. So, you know, really good long-term trends.
This is, this is a trend. It's a, a rising tide lifts all ships sort of approach. So we're expecting this to really benefit all of our, triple net, and shop operators. So, let's, let's break up triple net or triple net senior housing into three groups. So Brookdale, Holiday, and then the remaining two hundred million of rent, which represents a little more than 25% of the, triple net pool. Start with Brookdale.
So, you know, Brookdale, is the largest provider of senior housing in the country. They have 800 communities across 45 states. You know, Cindy and her team, are really, you know, doing the right things. We meet with them on a regular basis. We're really excited about, some of their operational initiatives.
Obviously, they bring the scale to, you know, to really leverage the opportunities in the senior housing fundamental, fundamentals coming. And we have a good collaborative, cooperative relationship with them. And I'll touch on, you know, how that's played out, you know, over the years. So last year, we completed sort of a win-win, mutually beneficial agreement with them. And what that did was we extended the lease term out to the beginning of 2026 . And in fact, if there's, if there is a change of control that were to happen, that gets extended out to the beginning of 2030 .
This gives long-term certainty to both parties, but for them to bridge to the silver wave, and it gives them time to execute on those operational initiatives that, frankly, we're really excited about. We're supporting them as we improve the portfolio through selective asset sales and dispositions. The way that works is we have a handful, call it a couple dozen assets, that maybe aren't the right fit for Brookdale and for Ventas.
We can pull those out and sell those. The rent stays behind, but they get a rent credit equal to a portion of the sales proceeds, so that will help improve the total portfolio quality. Another way that we're helping them is we're investing in attractive capital opportunities to improve the portfolio.
So the way this works is, you know, Brookdale obviously is responsible for the capital spending. If they spend $1,800 per unit, if they wanna go above that, they can come to us and say, "Hey, Ventas, would you like to help participate? We have revenue-generating projects," whether it's, you know, large unit turn projects or common area refreshes, generally revenue-enhancing projects.
We will actually participate and fund that at, at a yield, and we're actually doing that currently, and that will also help position their portfolio for success. So really excited about the opportunity for Brookdale, both from an industry perspective, leadership, initiative, scale, and the quality of the portfolio, for them to, you know, drive performance over the next five-plus years. You know, we think that, Cindy and her team, the outlook for the company, is great.
But you know, what I want to leave you with, moreover, is that we're confident in Brookdale. We're confident that they have more than enough equity value in their own assets. They have plenty of liquidity to satisfy its obligations to Ventas, and we feel good about how the Brookdale portfolio is positioned, you know, going forward.
So let me touch on Holiday, so another large relationship. It's a large player in the independent living space. With their size, they bring a level of scale and sophistication you would expect from a large operator. We meet with Lily, Tyler, and their team regularly to go through their operational initiatives. In fact, they were in our office two weeks ago.
We're really excited to see what the work that they're doing on lead generation and conversion, hospitality, technology, and we're gonna see how that plays out in the near term, and we really think that will drive drive some performance. In the meantime, NOI is stable and improving, and our agreements are well-structured. Sufficiently, we have a sufficiently capitalized guarantor. We have a material security deposit that's standing behind the lease.
And with the other landlords that have restructured their relationships with Holiday, the result is that Ventas is the sole landlord claimant on the guarantor, which is good for us. And so, you know, the guarantor entity, that is, has substantial net worth. They have owned assets in that guarantor that are standing behind our lease.
The fixed charge coverage on the guarantor is over 1.15 times. So what that means is the cash flow from our lease portfolio, plus the cash flow from the guarantor's owned assets combined, is more than enough to satisfy its obligations, whether there's mortgage debt on some of the owned assets and our leases. So we feel good about that.
We think there's sufficient tangible net worth and equity in the guarantor. And again, we're confident that not only will they have improving operations, they'll benefit from the tailwind of seniors housing demographics. They have the sophistication to drive performance and improve results, but they've got the financial wherewithal to, you know, satisfy the obligations to Ventas. And then to the last piece are the remaining smaller operators.
So we have 28 operators, which represent, let's call it the last 28% of our triple-net total portfolio. It's a little over $200 million of Ventas NOI rent, that is. In this portfolio, again, as I said earlier, no one operator represents more than 1% of total Ventas company. So these are all smaller relationships, which actually is good from a diversification perspective.
The important thing here is the trailing 12-month coverage on this portfolio is 1.3 times. So, you know, this group has, you know, plenty of cushion to cover their rent. You know, the business model is diversified. We have a mix of IL, AL, memory care all across, 33 states in the U.K. The lease duration averages 9 years for this pool.
Every lease, virtually every lease, we have strong covenants, security deposits. Oftentimes, we have personal guarantees and/or corporate guarantees, as well as security deposits. So, we feel good about where this portfolio is. However, we do have some operators that we've been working through some road bumps, you know.
And we expect in 2019 , which we've told you before, about $10 million of lease modifications in this portfolio, that will carry into 2020 . So that is senior housing, and then to bring it all together, just to remind you of our three tenets of triple net. So it's a large, diversified, and most importantly, well-structured portfolio.
Senior housing is a material portion of triple net, and that portfolio, again, some of the things that we're doing with Brookdale and others, are well-positioned to take advantage of the demographic tailwinds that are coming, and we expect this portfolio to generate 2%- 2.5% same-store CAGR over the next five years, and that's gonna contribute, as Bob will tell you later, to our total growth story at Ventas. So with that said, I think we have about 10 minutes for Q&A. So Juan has the mic, and we'll open it up for questions.
Excuse me. Thank you. My first question is regarding the Brookdale portfolio. Have you guys run the same data and analytics that you've run on your own portfolio? If so, you know, can you maybe characterize your expectations for when that portfolio will turn and what maybe the CAGR looks like for the next five years there?
Yeah. So, I'll take that one, obviously, senior housing. So, I will say that, Brookdale. One of the things that we did as part of the agreement last year, we don't really touch on some of the smaller details, but, as part of that agreement, they've agreed to provide us additional information.
So rent rolls, detailed rent rolls, for example, that'll help us, you know, on the SHOP side, we showed you the bell curve of age distributions, where people are moving from, you know, move-from addresses. It's, so that type of information, we've started gathering from them. Now, as you would expect, Brookdale's a large portfolio all across the country. They're going to follow the industry trends. So what you can expect, I believe, is you know, the crossover point that you see for our total triple net portfolio. That is largely driven, as you would expect, because Brookdale's a large piece of our triple net.
Can you go back to those slides?
Yeah. Absolutely.
Absolutely.
The crossover point. This is our triple net portfolio, okay? Brookdale is our largest tenant, so Brookdale's data is in here. And as you would expect for a large national operator, it's gonna follow the industry trends. We do expect a return to growth in this period. I think Brookdale has indicated, on, you know, in their remarks, that they expect, you know, a return to growth as well. Yes, I would expect them to follow the industry trends and have a positive outlook in the near term.
Second half of 2020?
Yeah, I mean, I think that, you know, one of the interesting things about occupancy that, as you think about this approach to the crossover point, you know, the because you have an average of a two-year length of stay, the people that moved in two years ago, if you know, move-in rate, because of, you know, that big bubble of supply, the supply-demand mismatch, the move-in rate may have been a little bit lower two years ago.
But that means the move-out rate today is going to be lower, and so you'll start catching up on occupancy even before you get to the crossover point. So I would expect, you know, Brookdale to see that. Whether it's the second half of 2020, you know, I don't know if I would call that for, you know, for Brookdale.
But definitely within this period, I feel confident that, you know, the data would suggest that they'll return to growth as well.
Lot of, you know, positive commentary about the data analytics and the future of the SHOP portfolio. Guess the obvious question is, if you feel that way, and you're sitting at what has been, you know, sort of, a long time at relatively thin coverage. I know you feel like it's gonna get better. But is it time to start really actively converting some of these from triple net to SHOP, on the view, A, that the coverage sort of seems to be annoyingly low, and, B, you've got a positive perspective on the market, and you probably wanna be a part of that and have it be more in the financials of Ventas? What are your thoughts on that?
Yeah, I would say that, you know, I think that the key for Ventas is a diversified portfolio, and that means diversified by business model. So, I don't think it would be right for Ventas and, you know, to move everything to SHOP. I will say that, maybe not on Brookdale, but on the senior housing portfolio, that's the 28 operators, we're always looking at, you know, opportunities where it's right to move things to SHOP or even vice versa, if it makes sense.
You know, SHOP, I think we're looking for the right markets with the right growth profile, and get the right operator in there. You know, but there's a place for triple net, and I think, you know, we wanna take a balanced approach.
So, I wouldn't expect you know, wholesale moves back and forth, but certainly some refinement. We'll use the data analytics and the submarkets to tell us which model we should use. Yeah, yeah, and we have done some, you know, both ways, by the way. But we have done, even this year, some conversions from triple-net to SHOP. Where it makes sense, we've moved some portfolios, some of the smaller portfolios to Eclipse Senior Living, our new middle market SHOP provider, which we're excited about. So yeah, we're taking advantage of those opportunities where it makes sense.
So if you just go back one slide?
Sure.
Do you have more? Oh, it's a different slide six. Maybe it's the one forward. Is there more confidence in Brookdale's bridge to growth or Ventas' pivot to growth?
Well, look, I mean, I would say that the-
It's just a joke, but-
Yeah.
But where does, you know, to Rich's question about whether you should be in net lease or in operating, if you want to keep these as net lease in terms of Holiday and Brookdale. Where does coverage go under a five-year model, tying Jordan's question about the growth potential, right? So if, if your SHOP portfolio is 4%-6% growth over the next five years, arguably starting off lower next year, 'cause I don't think you're giving guidance for 5% next year. Correct me if I'm wrong. What does that trend line look like here to get that one point one and point nine coverage? Where does it end up at the end of year five?
Yeah, you know, I don't think. We're not gonna give, obviously, a five-year property level outlook. You know, I would encourage you to ask Brookdale what they think their five-year growth is. But I will say that, you know, we expect the cash flow growth to outpace the rent escalators over a five-year period, and so that is the rehydration of coverage that we're seeing.
Where it'll end up, I mean, you know, as long as it's going north, that's good. That's, you know, they've got coverage to pay the rent, and I feel good about that. And no matter what, they have the financial resources, particularly Brookdale and Holiday, as I touched on, to, you know, the financial strength to pay the rent, so.
And then thinking about 2025, so a lot of that exposure is Brookdale as part of that $313 million, and I assume Kindred is the other big piece. When do you start negotiating with them about what that renewal is, to start structuring it so it's not all in one year? When does that process really begin in earnest?
Sure. You know, I think, you know, a year or two ahead of time, probably two years, we would start having those conversations. But I've got to tell you that, you know, when we get to 2025 , you know, the, the demographics are really heating up at this point. And this is what I love about our long lease maturities, that extend 2025 and beyond.
When we get to that point, our operators are gonna be begging us to renew these leases, I think. So, I feel good about the, you know, the renewal prospects, just based on, on the senior housing side, the demographics. We'll start having conversations with them, you know, 18- 24 months, at least, ahead of time, I would imagine.
Hey, Chris, you talked about the operators having the financial resources to pay the rent, but how do you ensure adequate protection that the operators will invest in the facilities and make sure that they, you know, essentially don't become obsolete while that operator is in there, and
Sure
... if they're essentially underwater on their asset, they're likely not investing adequate capital to keep it competitive long term.
Yeah. Well, so I think there's three things. First, our lease requires them to maintain the building. Just a blanket statement. They have to maintain the building, you know, in the condition that it was in or better, okay? So that's one.
Number two, there's often minimum requirements that they have to spend, and they have to give us support that they're spending that money, and we escrow money and ensure that they're spending that. So, the lease has sufficient, you know, protections. Brookdale, for example, is required to spend $2,000 at each community, at least $2,000 over each two-year period, per unit. So, you know, we expect the buildings to be maintained.
And then the third is, you know, we look for opportunities to co-invest with our senior living triple-net operators. Brookdale, again, is a perfect example. Where it makes sense, you know, we will go in with them. They're spending 1,800 per unit. Above that, for revenue-generating projects, we'll go in, and we'll get a return on that, and, you know, we'll invest in the building, and that only improves the value of the building. So I do think that we have plenty of protections. They have incentives to spend the money, and so do we, so.
Time for one more question.
So I think one of the probably most difficult things to predict, we could all see the demand coming, but on the supply side, I know that there's been some wiggle room provided in the analysis going out the next five years. But if we all see this silver wave coming, so do developers. And what's the risk of even missing the most conservative approach on the supply side for senior housing? And have you stress-tested the bear case?
Yeah
in and of itself?
Yeah, so we'll go back to the work that Ricardo was showing off this morning, and this applies to triple net as well. But, you know, the next three years, particularly, we have, you know, we have known ground, you know, groundbreakings, that we know when they're gonna open within a reasonable expectation.
We also know what's in the pre-construction phases, the permits, et cetera. So when you look out three years, that data is relatively known, right? So I feel good about that. When you get beyond that, you know, then the assumptions come in. You know, what are the new starts that we don't even know, that aren't even in permit phase, what are they gonna look like?
And we had those conservative assumptions and the upside assumptions, and I think even in the conservative case, where we said it's going to return to, say, the 2015 start levels, we still have a spread of positive net demand, you know, out within that five-year period. And again, it's largely driven by the fact that demand is going to continue to grow. I mean, we're getting past sort of the Depression era, you know, low birth rates and into the baby boomer birth rates.
And even though, you know, the average move-in age is, you know, 85, we still have a large chunk of the portfolio that are gonna be baby boomers, and every year, that gets bigger and bigger, and that's going to, you know, again, hopefully outpace supply.
But yeah, I mean, it, it is an assumptions-driven analysis. We've only gone out five years, but I feel good about the first three years, and I think years four and five, we have sufficient scenario-based outcomes to still show that it's positive. So I think that was the last one. We're actually right on time, so I'm gonna turn it over to Juan to tell you where, where you're all heading next.
Thank you, Chris and Jason. So this, this group, the yellow group, is now gonna head to the third floor. You can come with me. We're gonna listen to the MOB presentation.